The Three Stages of a Debtor

I am always being asked if there are any warning signals that you should be aware of when offering credit to your customers. With this information you should be able to avoid the need to instruct a debt collection agency.

Stage 1: The owner has the best of intentions.
The company is starting to experience some hard times but genuinely thinks it is only temporary. At this stage, the owner still has a positive outlook and wants to try to do the right thing when it comes to paying his creditors. Unfortunately, he cannot pay everyone in full so he works out a partial payment arrangement with most of his suppliers.

When a debtor is in Stage 1 they begin to act a little different as the signs of poor cash flow start to show.

Stage 1: Some Warning Signs
Your customer wants to make partial payments in an effort to get you paid. It takes you two or three calls before someone will call you back about your invoice. They say “the cheque in the post” when it isn’t.
Remember, during this stage the debtor thinks everything is going to be ok so his attitude is usually good and his excuses sound genuine.

Unfortunately, Stage 2 is looming:

Stage 2: Warning Signs
Cash flow is worse and the bills are getting out of control. Things go from bad to worse and he simply can’t afford to keep up with his payment plans. He hasn’t given up though, so his excuses still sound genuine; but they are getting more and more creative every day.
Now he has to prioritize. When he finishes a job or gets paid from one of his customers he sits down with all of his bills and simply puts them in priority from MUST PAY to NEED TO PAY then down to WON’T PAY. He is now officially in survival mode. Some of the bills that fall into each pile are:

• Need to pay (Unlikely to pay). Rent, payroll, utility bills, top suppliers that they cannot do without.
• Should pay (But will not). Advertising invoices, office supplies, middle range suppliers of products that they can get elsewhere.
• Will never pay. Memberships, subscriptions, low tier suppliers they do not need, suppliers with toothless collection policies, small balances that they know no one will ever pursue.

Even though he is in survival mode, he is still holding out hope that things will get better; but he is walking the cash flow tight rope. One false move and his company will go under.
Where do you think you fall on his priority list?

Stage 3:
The debtor’s situation is hopeless. He can’t afford to pay anyone anything at all. No longer do even his preferred suppliers receive payment. When he arrives at stage 3, the company will be closing its doors shortly and is going to file for bankruptcy/insolvency. Right before he enters this stage, the warning signs are clear and easy to read:

Stage 3 Warning signs
Stops returning calls, all partial payments cease. No more excuses, just states, “I can’t pay you” Since the company doesn’t have any cash flow, the time to use a collection agency has long passed.

Simply put, this debt is generally uncollectable now is the time to call a Debt Collector.

To find out more about Debt Collection visit our website at:

www.deanemcollections.co.uk